# 📊Top Momentum Investing Basics You Should Master

### Decoding Wall Street: The Mathematics of Wealth

# Wall Street Insider Report

Master the Mathematical Cycles of the Market. Join +1.5k Wall Street Insiders across 30 US states and 51 countries who are scaling by tenfold their investments.

# Top Momentum Investing Basics You Should Master

## Understanding Momentum Screening and Smart Beta Tilts

Imagine riding a wave that just keeps building, carrying you forward with increasing power and speed. That's the essence of momentum investing.

For investors looking to catch and ride these financial waves, mastering the basics of momentum investing isn't just a skill—it's an art form.

This strategy taps into the market's natural rhythms, allowing savvy investors to harness trends and achieve significant gains.

In this article, we'll uncover the core principles of momentum investing, transforming complex concepts into actionable insights. Whether you're an experienced investor looking to add another tool to your arsenal or someone new to the game, understanding these basics will empower you to make smarter, more strategic decisions.

Let's dive into the exciting world of momentum investing and discover how you can ride the wave to financial success.

**The Foundations of Momentum Investing**

Momentum investing is based on the simple yet powerful idea that stocks that have performed well in the past will continue to do so in the near future. This phenomenon, known as momentum, contradicts the efficient market hypothesis, which posits that past performance should not predict future returns. Momentum's roots are behavioral, arising from investor biases such as under-reaction to news and overreaction to past performance.

**Positive-Feedback Loops**

Momentum investing relies on a positive-feedback loop. When a stock's price rises, increased demand drives it even higher. This cycle continues until an external shock or internal market shift disrupts the momentum, leading to potential crashes.

Understanding this dynamic is crucial for investors looking to leverage momentum strategies effectively.

**Smart Beta Momentum Index Construction**

**Absolute Smart Beta Index**

Creating an absolute smart beta index involves starting with a reference index, like the Big 10 index, which comprises the ten largest firms by market capitalization.

From this index, only the top-performing stocks, based on a specific screening criterion like momentum, are held. This focused approach aims to capture outsized returns from the best-performing stocks.

**Smart Beta Tilts**

In contrast, smart beta tilts involve holding all stocks in the reference index but adjusting their weights based on their performance on the screening criterion.

This approach balances the exposure to the entire index while enhancing the weights of top performers and reducing the weights of laggards.

**Z-Score Normalization**

A critical aspect of smart beta tilts is normalizing past returns using z-scores. This process involves:

**Calculating the Mean and Standard Deviation**: Determine the average return and standard deviation of the stock's past performance.**Computing the Z-Score**: For each stock, subtract the mean return from the actual return and divide by the standard deviation.**Assigning Momentum Scores**: Convert the z-scores into momentum scores using the formulas:If z-score > 0: Momentum Score = 1 + z

If z-score < 0: Momentum Score = 1 / (1 - z)

**Real World Example**

To illustrate, consider this client’s Portfolio.

**Table Columns Explained**

**Symbol**: The ticker symbol representing each company.**Market Cap (in $ Billions)**: The market capitalization of each company, given in billions of dollars.**2022 Return**: The percentage return of each company’s stock in the year 2022.**Portfolio Weight**: The initial weight of each stock in the portfolio, based on market capitalization.**Z-Score**: The z-score of each stock, calculated based on its 2022 return compared to the average return and standard deviation of returns in the portfolio.**Momentum Score**: The score derived from the z-score, used to adjust the stock’s weight in the portfolio.**Momentum Weight**: The weight of each stock after applying the momentum score, prior to normalization.**Momentum Tilt Weight**: The final adjusted weight of each stock in the momentum-tilted portfolio, after normalization.

**Step-by-Step Calculation of Momentum Tilt Weight**

**Calculate the Z-Score**:

Let's walk through the calculation for one of the stocks to illustrate this process. We'll use PM 0.00%↑ as an example.

**z = (R-μ) /𝜎**

Where 𝑅 is the stock's return, *μ* is the average return of the portfolio, and 𝜎 is the standard deviation of the portfolio returns.

PM's 2022 Return: 6.76%

Average Return (𝜇) = -10.75%

Assume Standard Deviation (𝜎) = 22.47%

**Z-Score** = (6.76%-10.75%)/22.47% = **0.78**

**Determine the Momentum Score**:

**If z-score > 0: Momentum Score = 1 + z****If z-score < 0: Momentum Score = 1 / (1 - z)**

Since 𝑧>0: **Momentum Score** = 1+z= 1+0.78 = **1.78**

**Calculate the Momentum Weight**:

**Momentum Weight=Momentum Score × Portfolio Weight**

Given PM's Portfolio Weight: 25.22%

**Momentum Weight** = 1.78 x 25.22% = **0.45**

**Normalize the Momentum Weights to Obtain Momentum Tilt Weights**:

Sum the Momentum Weights of all stocks to get the total momentum score weight sum.

Divide each stock’s Momentum Weight by the total momentum score weight sum to get the Momentum Tilt Weight.

**Momentum Tilt Weight = Momentum Weight / Total Momentum Score Weight Sum**

Given the sum of all momentum weights is 139%

The PM 0.00%↑ **Momentum Tilt Weight** is 0.45/139% = **32.36%**

**Practical Applications and Investment with Smart Beta Strategies**

Amid the wide array of investment strategies available, leveraging the simplicity and broad market representation of the S&P 500 can be extraordinarily beneficial.

The Alpha Hedge Algorithm focus on the S&P 500, exemplifies this approach. This strategy leverages the S&P 500’s dynamics, offering a streamlined yet effective way to navigate the complexities of Smart Beta analysis.

By focusing on the S&P 500 during positive market cycles, investors can concentrate on capturing growth during favorable economic conditions and protecting their wealth during downturns.

**Accessing Smart Beta Strategies Through ETFs**

For those looking to implement advanced investment techniques with simplicity, smart beta strategies can be accessed through various S&P500 correlated ETFs, such as SPY 0.00%↑, these ETFs offer a cost-effective and convenient way to diversify portfolios and capitalize on market efficiencies.

**Implementing the Alpha Hedge Strategy**

By embracing the strategy of investing in the S&P 500 during positive cycles (identified the momentum), investors can simplify their decision-making process and harness the market's inherent efficiencies.

This approach enhances the potential for returns by focusing on the broader market dynamics.

Investors should remain vigilant, staying attuned to trend shifts in the index and potentially utilizing market cycle analysis to time their entries and exits according to momentum with greater precision.

**Conclusion**

Smart beta strategies, particularly those involving momentum screening and tilts, offer a sophisticated means to enhance portfolio performance.

By normalizing returns using z-scores and dynamically adjusting weights, investors can better capture momentum effects while managing risks.

While these methods introduce complexities, they also provide a more nuanced approach to investing, promising significant potential for those willing to delve into the details.

Nonetheless, smart beta ETFs offer an accessible entry point, allowing investors to tap into these advanced strategies without incurring prohibitive costs.

#### Over the past decade, our subscribers have outperformed the American market Mastering the Mathematical Cycles of the Market..

You too can make investment decisions based on objective data.

That's where the Wall Street Insider Report Comes comes in. We've developed a unique approach to investment management that puts you back in the driver's seat.

Know more about our 5-Year Plan and join +1.5k Wall Street Insiders across 51 countries who are scaling 10x their investments .↓